Why I buy stocks

Lessons from a nation with little faith in the market

KIEV, Ukraine (MarketWatch) — The question was so simple it startled me: “Why do you take the chance?”

I was speaking to a group of journalists at a program presented by the Foundation for Effective Governance here this week, discussing risk, investments and the workings of the market, when someone wanted an explanation for why anyone in America — but specifically me — puts my money into stocks.

Why do investors take risks?

What had become eminently clear was that they — the journalists, and to a much greater extent the people in Ukraine (at least everyone I talked with, from cab driver to hotel clerk to tour guide, shopkeeper and more) — do not take that chance.

They have their reasons, all of them compelling if you understand the market in Ukraine.

As I answered the question, however, I recognized that having to explain why we invest is an exercise that helps develop clarity and purpose, that forces a re-examination of past decisions with an eye toward what might happen next. If past decisions were made for the right reasons — based on solid research and process — it’s a process that is surprisingly comforting in uncertain market times. It reinforced my thinking.

You may not have an audience of Ukrainians to chat with, but you do have spouses, parents and children, who all are affected by or involved in your investment life, and who would benefit from explanations for your thinking. Financial advisers routinely talk about spouses left with a portfolio after the death of a partner who are paralyzed because they don’t want to mess up the strategy their beloved followed, but they don’t understand the thinking that went into it.

With that in mind, consider why you invest the way you do while learning a bit about why Ukrainians don’t invest like you.

Ukraine is considered by most investment experts to be a “frontier market,” meaning it hasn’t yet got sufficient economic or stock-market activity to qualify as an “emerging market.” According to Morningstar, there are less than a handful of mutual funds that own three or more Ukraine stocks in their portfolio, and there’s just one fund that currently has more than 4% of its assets in Ukraine-based companies. Most of the action in Ukraine stocks comes in issues traded on the London Stock Exchange.

The locals are right in line with the American money managers, saying they don’t buy Ukrainian stocks because they don’t trust the market structure; they would be more interested in holding American stocks or shares in Ukrainian companies listed on stock exchanges in New York or London, but they can’t invest in those places directly, so they are stuck with a market of several hundred stocks, all of which feel fly-by-night due to lax reporting standards.

Meanwhile, savers in Ukraine — and the strong savings ethic was evident everywhere, despite low wages — are able to get returns of 8% to 15% on bank deposits, with insurance similar to what Americans get from the Federal Deposit Insurance Corp., although the natives here tell you they are very worried about the safety of their money in the banks despite that protection, because of problems in the past.

Truthfully, if Americans could get returns like that on bank products, many would give up the stock market, sock it all into bank accounts and let the power of compound interest work in their favor.

But that’s not happening in the U.S., with interest rates closer to 1% per annum and hardly able to keep pace with ultralow inflation.

That brings the discussion back to why investors here “take the chance.”

Investing is all about balancing risk and reward.

While plenty of Americans believe the stock market is a rigged game, and complain about the lack of transparency or of the potentially damaging moves being made by politicians, they also recognize that running out of money or having insufficient purchasing power is a close second to “losing money” on the list of financial outcomes they want to avoid.

Thus, most Americans take the chance because they need a bigger return than they can get from cash or government bonds, and they then justify each equity choice because of the returns they expect versus the perception of how much they might lose.

Thus, as I explained in answering the question, I buy stocks because I believe each issue I purchase is a business where owners will be rewarded over time, sharing in the plusses of a strong business. I ride along — and often invest more — during times when those stocks are impaired by the business cycle because I still believe in the long-term benefits of owning the company.

Alexandra Lande / Shutterstock.com

Likewise, holding a core of index funds makes sense to me because I believe the long-term direction of the markets I participate in will be up, and at a rate that makes it worthwhile to take the chance.

As I get older, I am starting to become more conservative, not because experts say I should, but because having achieved some of my goals through riskier forms of investing, I am less interested in maximizing gains than I am in not messing up what I have achieved. Investors who are set for life would be wise to set aside what I like to call the don’t-mess-it-up money — the amount that will keep them financially stable for the rest of their days — and can then take whatever strategy they want with the rest, whether that means taking more aggressive stock positions or taking the money to a casino.

WHO SAID IT?'Ask for all your money back about every two years
to make sure [an investment firm is] legitimate. If my clients had done this with me, I
would have been caught sooner.'
READ THE FULL STORY.

By looking at each investment in your portfolio with an eye toward “Why am I taking this chance?” you can re-examine what is working and where your thinking has fallen short. You can decide if anything you are holding is no longer worthy of your opportunity capital, and you can decide which risks you can afford to take.

In short, however, understand this: We “take the chance” because we can’t afford not to.

Despite the economy, the politics, the regulatory environment and everything else investors complain about, it’s the only way most of us can expect to reach our lifetime goals. And if your investments aren’t leading you in the right direction, maybe it’s time to reconsider the chances you are taking with your money.

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